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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: gdichaz who wrote (1977)	5/15/1999 10:20:00 AM
From: Uncle Frank	Read Replies (1) \| Respond to of 54805

>> The authors' knowledge and experience was actually very narrow - computer centric. I very much agree with you Chaz2, except that I thought their sweet spot was software. Imo, the authors had some great ideas which would have made a fantastic article, and then added a few hundred pages of filler to turn it into a book. Their concepts have led to great returns for me, but I feel comfortable ignoring parts of their methodology. Geoff is not omniscient; he's a financial writer who wrote a great book. I hope Mike gets a chance to chat with Mr. Moore over his Q comments. It will make for some interesting discussion while we're waiting for the Casino to re-open. Frank

To: gdichaz who wrote (1977)	5/15/1999 11:14:00 AM
From: Mike Buckley	Read Replies (2) \| Respond to of 54805

SOMEWHAT OFF-TOPIC I think the study of gorillas and kings leads to some conclusions about companies that in their best day have no chance of becoming a gorilla or a king, occasionally presenting opportunities of another kind. To that extent, this post is off-topic or on-topic, depending on your point of view. Did you ever think I, of all people, would short a front office stock? Hey, if I can make money at it I'll do it. Pegasystems announced on Friday that AOL has chosen some of their products to be used internally. That sent the stock to a closing price that was 30% higher. The earliest reaction of the trading day had the stock trading 50% higher. However, the company also issued a TERRIBLE earnings report. The combination of the two news events and the market's emotional, inefficient reaction presents a shorting opportunity I can't pass up. I'll explain. Black Eye #1 Questionable numbers: In the last couple of years Pegasystems has had two bouts of stating questionable earnings reports because they were too aggressive in their accounting of revenues. One restatement of earlier reports was definitely made and I don't remember if a second statement was required because I stopped closely following the company The Street wants to avoid the stock because there's simply too much at risk with a management team that has more than once put out questionable numbers, if not numbers that inevitably were restated. Black Eye #2 The Financials: Despite the news about AOL (more about that later), the company at the same time issued their earnings report. Licensing revenues were down more than 25% from the year-earlier quarter. The company lost almost three times as much money as the analsyts expected. Though the CEO reported about $1 million increased cash for the quarter, FY98 operations ate up about $26 million in cash flow. With the huge net loss of this quarter, cash flow from quarterly operations (which I haven't seen) couldn't have been great. The high-margin part of the business (the licensing revenue) continues to fall and the low-margin part of the business (the services revenue) contrinues to grow. Not good. Black Eye #3 (It's a three-eyed monster. :) The market's reaction to the AOL news: First, there is the timing of the news. My experience is that when a tiny company brings out potentially huge news without quantifying the potential impact at the same time that it brings out fundamentally devastating news that is quantified, the potentially huge news probably isn't as huge as the market would like to think. I think the AOL news was brought out right now to mollify those who otherwise might have been devastated by the terrible earnings report. The mere timing of the news makes the relative importance of it highly suspect. Having said that, the second issue requires looking at the numbers to see if, indeed, I am right about the importance being suspect.. The market cap increased about $43 million. Prior to the news of the AOL deal, the PSR was about 2.2 and after the news it was about 2.9. Let's conservatively strike an average of 2.5 and call that the PSR the market is placing on the increased value of the AOL news. Dividing the $43 million increase in the market cap by the 2.5 PSR brings us to what might be a perceived value of $17 milion in increased revenues due to the AOL deal. Being conservative again, spread that out over an entire year, and it represents a 28% increase in the company's TOTAL revenues. Do I believe the AOL deal by itself is increasing Pegasystems's revenues by 28%? No I don't. In the front office software business a $1 million deal is a big deal. The stock market, in my opinion, is placing an extraordinarily impossible tangible and intangible value on the AOL news. Wish me luck in capitalizing on what I believe to be the market's inefficiency. --Mike Buckley